2. Valuation, law of one price, no arbitrage:

a. Suppose the current market price of corn is 4.35 per bushel. Your firm has a technology that can convert 1 bushel of corn to 4 gallons of ethanol. If the cost of conversion is 1.85 per bushel, at what market price of ethanol does conversion become attractive?

b. Suppose your employer offers you a choice between a 4,200 bonus and 300 shares of the company stock. Whichever one you choose will be awarded today.

The stock is currently trading for 28 per share. Ignore transaction costs.

(i) Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose? What is its value?

(ii) Suppose that if you receive the stock bonus, you are required to hold it for at least one year. What can you say about the value of the stock bonus now? What will your decision depend on?

c. You have an investment opportunity in Japan. It requires an investment of USD 2.5 million today and will produce a cash flow of JPY 270 million in one year with no risk. Suppose the risk-free interest rate in the United States is 1.5%, the risk-free interest rate in Japan is 1%, and the current competitive exchange rate is JPY 110 per dollar. What is the NPV of this investment? Is it a good opportunity?